Episode #13 – Recession, Hyperinflation, and Stagflation

It’s been a while, I know.  I’m still about 4 episodes behind, but I’m about to start publishing my posts on a fixed schedule to catch up, and so you know when to expect them.  Stay tuned for more info in the next post.

As per usual, this episode of Crash Course was a mixed bag of good, bad, and glossed-over economics.  I’m going to start with the most egregious mistake:

Military Spending

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Getting out of the depression took nearly a decade, and it wasn’t really monetary policy that put an end to it.  It was the massive government spending of World War II.

But Adriene!  Remember what you said in Episode 1?:

Military spending in the United States is over $600 billion per year.  That’s close to what the next top 10 countries spend combined…the opportunity cost of [each] aircraft carrier could be hospitals, schools, and roads.

I realize now that Crash Course believes any and all government spending is good for the economy, including things that do not benefit the public generally.  If you remember back to their discussion of opportunity cost in week one, every dollar spent (either by government or private persons) could be spent somewhere else (also either by government or private persons).  So why would Crash Course think that military spending can help get the government out of depressions?

In short: Keynesianism.  We talked about the show’s Keynesian Presuppositions before, but this makes it clear: Crash Course believes spending is what fuels the economy.  When people are not spending, governments need to step in and (tax and) spend for them!  If you recall, we critiqued this idea in episode 5, so I won’t go through it again, but in short: saving also fuels the economy.

Monetary Balance

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An increase in the money supply can have two effects.  It can increase output or increase prices or some combination of the two.  Inflation starts when output is pushed to capacity and can’t rise much further, but policymakers continue to increase the money supply.  In theory, once output is maximized, the more money you print, them more inflation you’ll get.

This theory, stated as fact here in Crash Course, is one of multiple ideas of how the money supply affects the economy.

First, the “output or price” dichotomy is generally not how most economists think of money printing.  All economic schools of thought believe that money printing will always increase prices, but some economists think that the boost to output is worth the pain of rising prices.  It’s not an either/or scenario; it’s an “is it worth it” scenario.  Sometimes the price inflation doesn’t occur immediately, but as the money circulates, prices will rise.

The Austrian School however, argues that money printing will distort the economy, flooding money into certain areas and creating bubbles, only to eventually crash and do even more harm than if the government had not interfered at all.


Crash Course rightly puts some of the blame for hyperinflation on central banks who print money to oblivion, but they also seem to blame consumers:

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After a couple of years of doubling prices, people started to expect high inflation, and that changed their behavior.  Say you’re planning to buy a new refrigerator, and you expect prices to rise quickly.  You buy it as soon as possible before the prices have a chance to change, but with everyone following that logic, dollars start to circulate faster and faster and faster.

Economists call the number of times a dollar is spent per year the velocity of money.  When people spend their money as quickly as they get it, that increases velocity, which pushes inflation up even faster.

Consumers do not create inflation (central banks do), but they can speed up or slow down how long it takes for the newly printed money to affect prices.  If the central bank printed a bunch of money but kept it out of circulation, prices would not rise, but when that money starts to circulate, then prices rise.  Once the new money is out there, it can take a long time or a short time for that to affect prices, but the eventual rise in prices is due to the initial money printing.

But Crash Course seems to think that consumers’ eagerness to spend is what pushes prices up, even if the printing has stopped.

Let’s imagine an economy without a central bank setting interest rates, and instead, interest rates were determined by the market.  If something like this were to happen and everyone quickly spent their money as soon as they received it, businesses who wanted large loans would have a very hard time getting them, since money is being spent instead of saved.  The most in need of loans would be willing to pay a premium for it, and banks would offer high interest rates to encourage people to save money, so they could lend it out to businesses.  People would eventually stop spending as much as they notice that it would be more beneficial to save their money and collect a high interest rate.

Once a central bank enters the picture, interest rates are held artificially below the market rate, encouraging people not to save and for banks to borrow more newly-printed money from the central bank for a low rate.

Later in the video, Crash Course uses the same logic to talk about rapid deflation: consumers’ expectation of lower future prices keeps them from spending and sends prices further down.  It’s a much harder argument to make for them, and we’ve already covered this argument in this post.


Crash Course correctly identifies what Stagflation is: when the economy is not improving but prices rise quickly.  But when they explain the United States stagflation, they miss a key point:

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The US experience Stagflation starting in the 1970’s after a series of supply shocks, including a rise in oil prices, and believe it or not, a die up of Peruvian anchovies, which were important for animal feed and fertilizer.

I’ll pick the “not” option.  Natural disasters and supply shocks can have negative (or stagnant) effects on the economy, but these do not cause the inflation part of the stagflation formula.  What does this have to do with central bank money printing?

It was very surprising to hear an entire section on Stagflation without mention of the Bretton-Woods System and the United States’ complete removal from the gold standard.  That’s almost like talking about the 2008 financial crisis without mentioning FEHA or Fannie Mae.


Bretton-Woods was a monetary system that the United States had from 1944 to 1971.  It was a quasi-gold standard, where the government still fixed the price of US dollars to gold.  The Bretton-Woods System also establish the US Dollar as a reserve currency, and allowed foreign countries to trade their US dollars for gold at the fixed rate.

Throughout the 1960’s, US money printing made many international countries nervous about the dollar’s viability, and many of them exchanged their US dollars for gold.  Eventually, the United States ended its international dollar/gold exchange, thus ending the Bretton Woods system and creating free floating fiat currencies across the globe.

Naturally, the end of the Bretton Woods system caused the US dollar to plummet in value relative to foreign currencies.  It became very expensive to import items and for US companies to do business internationally.  The resulting strain on international trade caused prices to soar in the United States.


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Crash Course Episode #9, Deficits and Debt, Part 1

In this week’s episode of Crash Course Economics, the hosts talk about deficits and debt.  This episode might have better scheduled if it were before the videos on Keynesian Macroeconomic Policy, where they talked about deficits and debt, only to define the terms later.

Debt and Spending

Crash Course opens the episode by defining the terms debt and deficit, and explaining how the United States has the largest debt of any country, but the US debt as a percentage of GDP is not as high as a few other countries whose economies are doing fine, namely Japan.  However, the major concern isn’t the current size of the debt, but the growing deficit.

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Most economists are not worried about the borrowing that the US has done already, because they are too worries about the borrowing they’re going to do.

This is true, and as shown in the graph above, the US deficit is scheduled to increase through in future decades as government spending increases.

In the “too much spending vs. not enough revenue” argument, Crash Course shows that revenue (i.e. taxes, fees, tariffs, etc.) is set to increase (as a percentage of GDP) in the coming decades, so this is “not the problem”.  While this is a subjective political argument (socialists and progressives might say that taxes are not high enough), we’ll assume that what she meant was that the increasing deficit is caused by increasing government spending, not decreasing revenue.

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To de-politicize the spending issue, our co-host Adriene gives her explanation of which side is right when it comes to the question of “Where is there too much spending?”:

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Let’s look at where the government actually spends its money.  Conservatives might complain “It’s obvious!  Handouts!”  Liberals will say “It’s obvious!  Defense!” Well, they’re both wrong.  So who’s the biggest recipient of federal dollars?

Grandma and Grandpa.  The government spends about a quarter of the budget on Social Security, and another quarter on healthcare programs.  A lot of that goes to retired people on Medicare.  They deserve it!  They worked hard.  And those are the programs that are expected to grow as baby boomers retire and live longer.  Defense and other discretionary programs are actually projected to shrink slightly as a percentage of GDP.

First, let’s ignore the out-of-place and opinionated commentary of “they deserve it!  They worked hard.”

Second, while retirement spending is scheduled to increase significantly, so is defense.

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The graph above shows the nominal costs of the Department of Defense.  Until about 2022, there is an increase in spending.  After that, it will stay at about 600 billion per year.

However, Adriene is right that Defense will shrink as a percentage of GDP, as you can see in the graph above.  So if we’re looking at the cause of the increase in the deficit, as opposed to the already large deficit/debt or spending in general, she is correct.

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Also, if tax-funded healthcare for the elderly is one of the leading causes of the increasing deficit, are conservatives actually wrong when they complain about “handouts”?  I understand that Crash Course tries to remain politically neutral, but if the argument is between handouts vs. defense being the cause of a rising deficit, and you explain that Medicare is a primary cause, conservatives (in this case) are not wrong.

Also, in the liberals vs. conservatives argument, rarely have I heard the argument phrased within the context of defecit as percentage of GDP.  Liberals are usually arguing that there is and has been too much defense spending generally, and conservatives argue against handouts being such a large part of the budget generally.

Debt and Borrowing

Our co-host Mr. Clifford explains how the US finances its debt:

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First, to borrow, you need lenders, people who have decided to save money and loan it out, rather than spend it on something else.  But there is a finite amount of money that savers can lend, and most of that savings is borrowed by the private sector, which is consumer that take out car loans and businesses that pay for things like factories and computers.

When the government runs a budget deficit, it borrows from that same pool of savings.  And if the government continues to borrow, many economists worry that there will be fewer loans available for businesses, and that will hurt the long-run growth of the economy.

This is a huge misrepresentation of how government fuels its debt.  Here is a graph that accurately shows who hold the government debt:

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As you can see, domestic private investors, like what Mr. Clifford was talking about, account for less than 15% of government debt.  The largest portion (34%) comes from international investors, which could be foreign governments or foreign citizens who are lending money to the US government and hoping to be paid back when the bond matures.

Federal Accounts accounts for 28%.  This is where the government essentially borrows money from itself.  Since different departments have different budgets, and some don’t necessarily need to spend it this year (for example, the budget that holds the Social Security deposits you’ve contributing to and hoping to get back eventually), other departments can borrow from those accounts and promise to pay it back later.

The Federal Reserve accounts for 14% of the debt.  This is when the government creates money with a push of a button and buys treasury bonds (which is what you get when you loan money to the government).  When the loans matures, the money is then just put into the treasury.

This is a big misrepresentation by Crash Course, and I was very surprised that they described US debt holders as only domestic lenders.  How did this script get through production without someone saying “maybe we should say that this is only about 15% of debt, and there are many other ways the US finances its debt?”

We’ll pick back up with the rest of the video in Part 2.  Stay tuned to see what Crash Course says about interest rates, and scenarios when spending might not get out of control.


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Crash Course Episode #8, Fiscal Policy and Stimulus, Part 1

Crash Course’s most recent video on Fiscal Policy and Stimulus has its ups and downs.  The show’s hosts acknowledge the controversy surrounding Keynesian economics, but not before treating the ideas favorably.  The show equates free market economics with antiquated (and wrong) medical science, and presents only two (both government-centered) economic policies as the potential solutions to national recessions.  Let’s start from the beginning:

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Recessions vs. Unemployment

Crash Course spends the first few minutes of the video talking about what it means when a country is in a recession, followed by a brief history of recessions in post-WWII United States.

The episode notes that dips in the economy correspond with rising unemployment, and unemployment is linked to a number of other negative societal factors: namely suicide, domestic violence, and social upheaval.

Fortunately, Crash Course also mentions that unemployment is not the only potential monster to the economy.  The show gives equal time to discussing the problems with inflation:

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High inflation can be just as bad.  Rising costs wipe out savings and have been the root of protests and riots around the world…

…Many economists argue that policymakers should intervene in the macroeconomy in order to promote full-employment or reduce inflation.

Without directly saying so (at least not yet), the show implies that large-scale unemployment and inflation happen naturally, and government policy may be necessary to fix these problems.

As I wrote about in last week’s episode on inflation, inflation doesn’t just happen naturally in the market.  Widespread price increases happen from new money being created and flowing through the economy.  When Crash Course says “many economists argue that policymakers should intervene in the macroeconomy,” they should also clarify that government monetary intervention has already occurred, and now people are considering if fiscal economic intervention is necessary.


To give them credit however, they are correct that unemployment would still occur in a free market.  All schools of economic thought would agree that as industries are constantly growing and shrinking, and people get laid off when their industry shrinks.  The real question between schools of thought is how a very high unemployment rate occurs, and whether government intervention prevents this from occurring (or causes it to occur).

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Expansionary/Contractionary Policy

Before mentioning that what they are about to explain is debated between schools of economic thought, Crash Course explains Keynesian fiscal policy as generally agreed upon by economists.  They later use examples from the 2008 recession to illustrate how this method of thinking is practiced in the United States, explaining away common objections to their example:

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In 2009 the US government launched a huge stimulus program in response to the financial crisis.  Despite that, employment and GDP both fell.  That sounds like a failure, but the majority of economists think that the situation would have been far far worse without that stimulus.

I mentioned this in a previous post, but if a scientist declares his hypothesis to be true, and then despite their own contrary experimental results, still declares his hypothesis to be true, there’s no use trying to convince him.  They will declare themselves the winner regardless.

Keynesian fiscal theory is based on two main assumptions: decreasing taxes and increasing government spending help the economy (and the reverse hurts the economy).  Their own admitted problem is that helping the economy in this way requires the government to increase their debt, which will be paid back in better economic times.

Taxes hurt the economy.  This is agreed upon by all economic schools of thought, even the communists.  When you take away wealth from a people, what is left is worse off than before.

Government spending helps the economy. Freemarketeers may disagree with me here, but hear me out: government spending, per se, generally helps the economy.  The problem is that government spending necessitates taxes in one form or another.  Free market theory argues that money is better spent in the market than by governments, not that government spending (again, per se), doesn’t do anything good for anyone.


The problem is, you can’t have government spending without taxes, and while Keynesian expansionary policy may seem like you can have your cake and eat it too, issuing debt in the present is the same as taxing the future.  Keynesian economic policy taxes the future for government spending and lower taxes in the present.

Since the increase in present government spending has to come from somewhere, this policy shifts spending from the future market to the current government.  Since freemarketeers argue that any shift from the market (present or future) to government necessarily makes the economy worse off, freemarketeers oppose Keynesian fiscal policy.

So what’s up with the video’s comments on Austerity and the Multiplier Effect?  Stay tuned for Part 2.


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The Business Cycle, Crash Course Episode #5

Economies grow and recede.  Recently, people have related economic recessions to bursting bubbles.  In 2001, the United States saw the Dot Com bubble burst, and in 2008, there we saw the housing bubble burst.  The ebbs and flows have been a part of every economy since people started keeping track of economic data.  But why does this happen?

Depending on which economic school of thought you prefer, you can have many different answers.  Communists might argue that recessions are caused by capitalists acting in their own self-interest and taking advantage of the working class.  For example, in 2008, banks were giving loans to people who could not afford to pay them back.  When people stopped paying the loans back, money that was relied on was not there, and the economy suffered.


While this explanation of recessions (which can be summed up in one word: greed), is a catch-all for an incredibly complex economic dynamic that occurred over several years, it is not adequate.  A real look into the business cycle would explain not just how the past recession occurred, but why recessions will continue in the future.

Crash Course and Keynesianism

We mentioned before how Crash Course, while admitting that there are different theories for economic phenomena, favors one in particular for macroeconomics: Keynesianism.

To be fair, the Keynesian explanation of the business cycle is also what is taught in your average economic textbook, so we shouldn’t be too surprised.  It is explained in the video using the common analogy of a car:

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If we imagine the economy as a car, then GDP, employment, and inflation are gauges.  A car can cruise along at 65 miles per hour without overheating.  Safe cruising speed is like full employment; unemployment is low, prices are stable, and people are happy.

But if we drive that car too fast for too long, it’ll overheat.  In an economy significant spending increases GDP, causing an expansion.  Unemployment falls and factories start producing at full capacity to keep up with demand.

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Since the amount of products that can be produced is limited, people start to outbid each other, resulting in inflation.  Eventually, production costs increase as workers demand higher wages and the economy starts to slow down.  Businesses lay off a few workers.  Those workers spend less, causing the businesses that produce the goods that they would otherwise buying to lay off more workers.  

This is a contraction.  The economy is going too slow.  Eventually things stabilize, production costs fall as resources are sitting idle, and the economy starts to expand again.  This process of booms and busts is called the business cycle.

A lot of this explanation is fluff, but the essential explanation of the business cycle can be cut down to the following:

People start to outbid each other [for resources], resulting in inflation.  Eventually, production costs increase as workers demand higher wages and the economy starts to slow down.

Essentially, the price of raw materials increases, and workers demand higher wages.  The combination of the two hurts business, which starts the downturn.  Let’s take a look at these two separately: